Effect of Investor Category Trading Imbalances on Stock Returns^*

Abstract

Trading is the mechanism of the economist's 'invisible hand,' the means by which price discovery occurs. We use daily shareholdings data from the Australian equities clearinghouse to investigate the impact of the trading imbalances of investor categories on stock returns. Our evidence does not contradict the behavioral finance assumption that the trading of individual investors contributes to price discovery. Furthermore, we find that, while the trading of all investor categories Granger-causes returns, returns Grangercause trading only for the individual investor category. That is, in the short term of up to 1 month, only individual investors engage in feedback trading.

Feedback trading and the ramadan effect in frontier markets

“…Significant negative feedback trading has been reported for retail investors in Australia(Colwell et al, 2008) and Finland(Grinblatt and Keloharju, 2000), no feedback trading has been discovered among retail traders in China(Feng and Seasholes, 2004), whileDorn et al (2008) found that German retail investors' market orders (executed limit orders) were associated with positive (negative) feedback trading.…”

Retail investors exonerated: the case of the January effect

“…Notably, Kumar and Lee (2006) observe that retail investor trading explains return co‐movements in the types of stocks in which retail investors have a large representation, such as small stocks. Colwell et al. (2008) show that trading by Australian retail investors correlate with Australian stock returns, though not as expected.…”

COVID-19 pandemic effect on trading and returns: Evidence from the Chinese stock market

“…On the issue of the impact of investors’ net flows on returns, the previous research focus on two points: the contemporaneous impact and the long-horizon impact. Most studies support the positive contemporaneous impact, which has been named price impact ( Edelen and Warner, 2001 , Richards, 2005 , Colwell et al, 2008 , Ülkü and Weber, 2013 ). If the positive impact is reversed subsequently, it is attributed to price pressure, and if permanent it is interpreted as investors’ marginal information advantage, which shows their forecastability ( Froot and Ramadorai, 2001 ).…”

“…In most studies, the evidence of institutional positive feedback trading is reported in developed markets ( Sias and Starks, 1997 , Edelen and Warner, 2001 , Griffin et al, 2003 , Cai and Zheng, 2004 ). However, some research also shows no significant institutional feedback trading ( Colwell et al, 2008 ).…”